August 2020 / United Kingdom

Among the corporation tax measures taken in the Finance Act 2020, the corporation tax (CT) rate was maintained for year 2020/2021 and a new Digital Services Tax (DST) was introduced.

CT rate for the financial year 2020/2021

The CT rate has been set at 19% for the financial year 2020/2021. This is a change from the 2015 Budget announcement that the rate would be reduced to 18% from 1 April 2020, and the 2016 Budget announcement that the rate would be further reduced from 18% to 17% from 1 April 2020.

DST

A new 2% tax on the revenues arising from digital services which derive value from UK users is applicable as from 1 April 2020. The purpose of the measure is to ensure that large multinational businesses in the scope of the measure make a "fair" contribution to supporting vital public services (as user participation is not the test for allocating profits between different countries).

Scope of the DST

The DST applies to group´s businesses obtaining digital services revenues attributable to UK users. The following are considered digital services activities:

• social media service: being services in which the main purpose (or one of the main purposes) is to promote interaction between users or between users and user-generated content and sharing user-generated content;
• search engine: not defined as such but it does not include searches in the very same website or facility; and
• online marketplace: being services in which the main purpose (or one of the main purposes) is to facilitate sales between users, i.e. services enabling users to sell, advertise or offer particular things to other users.

So considered associated digital services activities (such as the ones facilitating online advertising or generating significant benefit from the association with the digital service activity) are also in the scope of the DST. Where revenues arise in connection with a digital services activity, the revenues are to be treated as arising in connection with the activity "to such extent as is just and reasonable".

Persons liable to DST – DST calculation

DST is imposed at the level of group businesses that provide digital services activities with the following conditions:

• that the total amount of digital services revenues arising in an accounting period to members of the group exceeds GBP 500 million; and
• that the total amount of UK digital services revenues arising in that period to members of the group exceeds GBP 25 million.

If the above conditions are met, the members of the group are liable to a 2% DST in respect of the UK digital services revenues generated in an accounting period, being the first GBP 25 million of revenue derived from UK digital services activities excluded from the calculation.

For more information about the DST, see this HMRC guidance.

The Finance Act 2020 can be accessed here.

Report from Rebecca Sheldon, Barrister, Old Square Tax Chambers

United Kingdom enacted Finance Act (FA) 2020 introducing some key changes to the UK income tax legislation. In particular, those changes concern workers' services provided through intermediaries and changes to the loan charge mechanism as summarized below.

Workers' services provided through intermediaries

The off-payroll rules (IR35) were designed to ensure individuals who are in reality employees but work through an intermediary, such as a limited company, pay the income tax and national insurance contributions of an employee, rather than a self-employed worker. On 27 April 2020, the House of Lords Finance Bill Sub-Committee released its report entitled "Off-Payroll Working: Treating People Fairly", which in summary argued for caution in extending the rules as there has been evidence that the existing rules were problematic. However, the FA 2020 extended the rules in the following way having effect from 6 April 2021:

• all public sector clients and medium or large sized private sector clients will be responsible for deciding a worker's employment status; and
• as a result of the above, if a worker provides services to either public sector or medium-sized or large private sector clients, they should obtain an employment status determination from the client, being provided, however, with the right to dispute it.

Loan charge mechanism

The 2019 loan charge mechanism was announced at Budget 2016 and applied to disguised remuneration loans from as far back as 1999 that were outstanding on 5 April 2019. The loan charge mechanism constitutes an anti-avoidance measure to prevent individuals from being paid in loans instead of a salary and, thereby, avoiding income tax and national insurance contributions. It works by stacking the years so that income received as loans across multiple years is taxed as if it had been paid all in one. The following changes were introduced by FA 2020:

• the loan charge mechanism now only applies to loans made on or after 9 December 2010;
• the loan charge mechanism will not apply to outstanding loans made in any tax years before 6 April 2016 where a reasonable disclosure of the use of the tax avoidance scheme was made to HM Revenues and Customs (HMRC) and HMRC did not take action;
• an individual subject to the loan charge can elect to pay their loan balance across three tax years;
• HMRC will refund "voluntary payments" made to prevent the loan charge arising and included in a settlement agreement since March 2016 for any tax years where the loan charge no longer applies (i.e. before 9 December 2010) or there was reasonable disclosure of a loan made before 6 April 2016 and HMRC did not take action; and
• there has been additional flexibility over the way payments can be made relating to the level of income a person has (to prevent undue hardship).

It should be noted that the independent review made by Sir Amyas Morse indicated a number of issue concerning the aforementioned changes to the loan charge mechanism. In particular, it was considered that the loan charge was disproportionate in that it went too far back in time to when the legal position was unclear and that stacking years together was too different from how income would normally be taxed.

On 22 July 2020, the Finance Bill 2019-2021 received royal assent becoming an Act of the British Parliament (the Finance Act 2020). The Finance Act 2020 introduces a number of important amendments, including, without being limited to, the following highlights:

• changes to the IR35 legislation that concerns cases according to which a worker, who is engaged through an intermediary, should be treated as an employee rather than a worker for tax purposes. From 6 April 2021, the changes will entail that all public sector clients in addition to medium-sized or large private sector clients will be responsible for deciding a worker's employment status;
• changes to the Loan Charge legislation that concerns the loan charge imposed on disguised remuneration under which a person is paid via a loan that is never repaid. The changes limit the loan charge's application to loans entered into force after 9 December 2010;
• changes to principal private residence relief concerning, in particular, the exemption period at the end of ownership that is reduced to 9 months in most cases;
• the introduction of the Digital Services Tax; and
• changes to the General Anti Abuse Rule (GAAR), including protecting adjustments under the GAAR before the time limit expires and the issuing of protective GAAR notices.

The Finance Act 2020 can be accessed here.